Business Policy and Strategy_Project Report

Business Policy, Planning and Strategy Page 1

Indian Oil & Gas Industry

Submitted by -Yash Khandelwal (154)Yogesh Nivangune (155)Sudhir Prajapati (156)January 9, 2013

Introduction – Indian Oil and Gas Industry

India is the world’s fourth largest consumer of primary energy and accounts for about 4.6 per cent of the world's energy consumption after China, US and Russia.

Vandana Hari, Asia Editorial Director, Platts, believes that India’s tremendously growing energy demand has made the country an energy leader on the global platform with more than 28 billion tonnes of prognosticated reserves. The Government of India's New Exploration Licensing Policy (NELP) launched in 1997-98 has garnered investments over US$ 14 billion and has resulted in 87 oil and gas (O&G) discoveries. NELP has encompassed all the ingredients of a favourable investment climate, fiscal stability, transparency of the rule of law, contract stability, minimal policy induced uncertainties and a stable legal and regulatory framework.

The refining sector in India has also undergone a silent transformation wherein the country emerged as a major export hub. With a refining capacity of 215 million metric tonnes per annum (MMTPA), exports of petroleum products have now crossed 60 million tonnes (MT), raking-in revenues of about US$ 60 billion. ‘Petroleum products’ have emerged as the single largest component of merchandise exports from India.

Production and Consumption – Key Statistics - The hydrocarbons sector is continuously undergoing changes and policy modifications are in-tune with them. Natural gas is rapidly contributing to the energy requirements owing to commercial development of coal bed methane, shale gas, underground coal gas and gas hydrates. President Pranab Mukherji anticipates that natural gas usage will increase significantly in the years to come while urging the need to connect various parts of India with gas pipelines so that economic benefits of natural gas reach to all. The Government of India (GoI) is also lending full support to companies acquiring overseas O&G assets and imports of liquefied natural gas (LNG).Diesel & Petrol - Petroleum products are India’s biggest export earner, fetching revenue of about US$ 59 billion annually. Export of these products stood at 28.9 MT during April-September 2012, according to the petroleum ministry’s data wing, the Petroleum Products Planning and Analysis Cell (PPAC).

During 2011-12, the consumption of petroleum products was about 148 million metric tonne (MMT) showing an import dependence of more than 75 per cent.

Diesel consumption, which makes up for more than 40 per cent of the fuel sales, registered a growth rate of 7.2 per cent at average 87, 000 barrels per


day (b/d) in September and October 2012 wherein automobile sector contributed majorly (as reflected in the sale of diesel vehicles).

Gas Sector - India's shale gas reserves are at about 290 trillion cubic feet (TCF), of which 63 TCF could be recovered, according to a study by US Energy International Agency. Shale gas is natural gas formed from being trapped within shale formations.

Natural gas sector constitutes about 9.8 per cent of primary energy consumption which is projected to grow up to 20 per cent by 2025 as per Indian Hydrocarbon vision. About 65 per cent of natural gas consumption is accounted by power and fertiliser sectors. Petroleum and Natural Gas Regulatory Board chairman S. Krishnan stresses on the need to evolve a strategy to meet significantly higher share of energy needs from natural gas and take its contribution in the country’s energy basket from 9.8 per cent to 25 per cent in the medium term. The production of natural gas in India was 135 million metric standard cubic metres per day (MMSCMD) during 2011-12.

Future - Majorly driven by transportation and industrial sectors, demand for oil is anticipated to surge immensely by 2020 while domestic power and fertiliser industries are projected to drive the demand for natural gas in the country. Given the recent exploration and development efforts undertaken in India, domestic production of O&G is expected to increase substantially. Furthermore, development of technologies enabling efficient use of fossil fuels coupled with use of renewable energy sources could help in filling the demand-supply gap for O&G. The Government has already started taking initiatives to reduce the country’s dependence on imports by encouraging exploration of alternate fuel sources such as coal bed methane (CBM), gas hydrates, hydrogen fuel cell, and blending of bio-fuels.

The top two companies in this sector are Reliance Industries limited and Oil and natural gas Corporation, so we have selected these 2 companies for the implementation of SWOT - EFAS, IFAS, SFAS and TOWS matrix.

Company details – Reliance Industries Ltd

RIL is an India-based company. The company is India's largest private sector company on all major financial parameters. They are the first private sector company from India to feature in the Fortune Global 500 list of 'World's Largest Corporations' and ranks 117th amongst the world's Top 200 companies in terms of profits. The company operates world-class manufacturing facilities across the country at Allahabad, Barabanki, Dahej, Hazira, Hoshiarpur, Jamnagar, Nagothane, Nagpur, Naroda, Patalganga, Silvassa and Vadodara. The company operates in


three business segments: petrochemicals, refining, and oil and gas. The petrochemicals segment includes production and marketing operations of petrochemical products. The refining segment includes production and marketing operations of the petroleum products. The oil and gas segment includes exploration, development and production of crude oil and natural gas. The other segment of the company includes textile, retail business and special economic zone (SEZ) development. Reliance Industry is the world's largest polyester producer and as a result one of the largest producers of polyester waste in the world. In order to deal with so much waste, they operate the largest polyester recycling centre that uses the polyester waste as a filling and stuffing. This idea was resulted in an award of 'Team Excellence'.

Oil and natural gas Corporation –

More than half century survival in oil and gas industry is a record of work by Oil and Natural Gas Corporation Limited (ONGC). It was originated in the year of 1956 as a private sector company. Later, in the year 1993 the company was came to known as Public Sector Company. ONGC's habitual activities deals with exploration, development and production of Crude Oil, Natural Gas, LPG and some other value added petroleum products such as NGL, C2-C3, Aromatic Rich Naphtha and Kerosene. The company going along with two of its folds namely ONGC Videsh Limited (OVL) and Manglore Refinery & Petrochemicals Limited (MRPL) and ten of Joint Ventures/Associates. ONGC's Basins are totally seven in numbers, Western Offshore Basin (Mumbai & Baroda), KG Basin (Rajamundary), Cauvery Basin (Chennai), Assam & Assam-Arakan Basin (Jorhat), CBM-BPM Basin (Kolkata) and Forntier Basin (Dehradun) and ONGC has two plants situated in Uran and Hazira. The company covers five regions such as Mumbai, Baroda, Nazira, Chennai and Kolkata and also ONGC running eleven institutes for different specialisation in different locations. ONGC involved in exploring for and exploiting hydrocarbons in 26 sedimentary basins of India, and owns and operates over 11,000 kilometers of pipelines in the country. Its international subsidiary ONGC Videsh currently has projects in 15 countries. ONGC has been ranked 357th in the Fortune Global 500 list of the world's biggest corporations for the year 2012. It is also among the Top 250 Global Energy Company by Platts.

1. SWOT Analysis –

It is a classical strategic planning instrument. By using the framework of strengths and weaknesses and external opportunities and threats, this instrument provides a simple way to estimate the best way to implement a strategy.


http://en.wikipedia.org/wiki/Platts

http://en.wikipedia.org/wiki/Fortune_Global_500

This instrument helps the planners of what is usually achieved, and what things should be considered by them. SWOT Framework - a 2 x 2 matrixes should be done in a group of key members of the team or organization. First, it is important to know clearly about what the purpose of the key changes and in what the team or organization a SWOT analysis will be undertaken. Once these questions are clarified and agreed upon, one can begin by brainstorming idea and then having it sharpened and clarified in the discussion. Estimation of the internal capacity will help identify where a position of the project or organization today is - what resources can be utilized and what problems have to be resolved. By doing this we can identify where/when new resources, skills or new partners will be needed. When thinking about strength, it is necessary to think about examples of the real success and what is their explanation. An estimation of the external environment tends to be focused on what is happening outside the organization or on fields that are not yet affecting the strategy but may influence the strategy - both positively and negatively. It's important that we pay attention to what actions and solutions that may arise. Level of correlation should be viewed from 2 sides/directions in the terms of both internal and external conditions. The strategy that can be planned for the institution based on the SWOT matrix is shown in the box numbers 5, 6, 7 and 8 in below given table. Technical implementation of the strategic plan is as follows –

Strengths (3) Weaknesses (4)

• Strength • Weakness 1

•…………….. • ………………

• Strength N • Weakness N• Opportunity 1• ……………• Opportunity N• Threat 1• ………………• Threat N

Opportunities (1)

Threats (2)

INTERNAL CONDITION

EXTERNAL CONDITION

(5) (6)

(7) (8)

1. Box number 1 is filled with opportunities that can be utilized by the organization.

2. Box number 2 is filled with threats faced by the organization3. Box number 3 is filled with the strength held by organization4. Box number 4 is filled with weaknesses faced by the organization5. Box number 5 is filled with the strategy presented in the form of

development programs which can be used to take advantage of opportunities by utilizing the existing strength.


6. Box number 6 is filled with the strategy presented in the form of the development program that can be used to reduce the weaknesses by looking at the existing opportunities

7. Box number 7 is filled with the strategy presented in the form of the development programs that can be used to reduce and to anticipate the threats by looking at the existing strength.

8. Box number 8 is filled with the strategy presented in the form of the development programs that can be used to reduce the weaknesses and threats that they face. Inclusion of development programs at boxes 5, 6, 7 and 8 must be sorted by their priority.

Advantages of SWOT Analysis

It is a source of information for strategic planning. Builds organization’s strengths. Reverse its weaknesses. Maximize its response to opportunities. Overcome organization’s threats. It helps in identifying core competencies of the firm. It helps in setting of objectives for strategic planning. It helps in knowing past, present and future so that by using past and current

data, future plans can be chalked out.

SWOT analysis groups key pieces of information into two main categories:

External factors (EFAS) – The opportunities and threats presented by the external environment to the organization.

Internal factors (IFAS) – The strengths and weaknesses internal to the organization.

The internal factors may be viewed as strengths or weaknesses depending upon their effect on the organization's objectives. What may represent strengths with respect to one objective may be weaknesses for another objective. The factors may include all of the 4Ps; as well as personnel, finance, manufacturing capabilities, and so on. The external factors may include macroeconomic matters, technological change, legislation, and socio-cultural changes, as well as changes in the marketplace or competitive position. The results are often presented in the form of a matrix.

a. External factor analysis summary (EFAS) – Reliance Industries Limited -


S NO

Opportunities W R WS Comments

1Strong domestic energy demand

0.12 4 0.48Enjoy value add due to forward integration

2 NELP & OLP 0.10 4 0.40 More ease to avail blocks

3Untapped domestic Oil & Gas potential(More oil well discoveries)

0.08 3 0.24 29% of blocks area awarded are with RIL

4

For petroleum products and pipeline sector, FDI is permitted up to 100% through different routes.

0.08 4 0.30It would help of to form more JVs and increase exploration portfolio

5Different types of Oil Reserves, CBM, shale gas

0.05 4 0.20Investment in shale gas blocks in North America

6Increasing Natural Gas market

0.05 3 0.15Has a big natural gas block under operation

7 Foreign opportunities 0.03 4 0.10International presence & ability & intent to further exploit international opportunities

Threats

1Delayed Clearances & government interference

0.12 3 0.36Due to multiple clearance , many approvals stuck at different stages

2

Upstream skills, dependence on borrowed technology and equipment shortage

0.10 3 0.30 Less experience hence dependence

3 Exchange rate fluctuations 0.08 4 0.32 small international portfolio

4 Environmental laws 0.08 2 0.16Projects stalled due to unable to get the clearances under the same

5Uncertainty of Oil & Gas recoveries

0.07 3 0.21Output of the discovered asset uncertain at times eg KG 6

6Increased competition within government and private players

0.05 4 0.20Strong financial position help to acquire blocks

Sum 1.00 3.42

Oil and natural Gas Corporation –

S Opportunities W R WS Comments


NO

1Strong domestic energy demand

0.12 4 0.48 huge demand for the explored products

2 NELP & OLP 0.10 4 0.40 More ease to avail blocks

3Untapped domestic Oil & Gas potential(More oil well discoveries)

0.08 4 0.32 50% of blocks area awarded are with RIL

4

For petroleum products and pipeline sector, FDI is permitted up to 100% through different routes.

0.08 4 0.30It would help of to form more JVs and increase exploration portfolio

5Different types of Oil Reserves, CBM, shale-gas

0.05 3 0.15Have screened few projects but yet to act on it

6Increasing Natural Gas Market

0.05 2 0.10Small player in domestic natural gas exploration

7 Foreign opportunities 0.03 4 0.10International presence & ability & intent to further exploit international opportunities

Threats

1Delayed Clearances & government interference

0.12 3 0.36Being a PSU has minimal government clearances problems

2

Upstream skills, dependence on borrowed technology and equipment shortage

0.10 4 0.40 Vast experience

3 Exchange rate fluctuations 0.08 2 0.16 Big International portfolio

4 Environmental laws 0.08 4 0.32 Very few projects stalled

5Uncertainty of Oil & Gas recoveries

0.07 3 0.21 Diversified and huge portfolio

6Increased competition within government and private players

0.05 4 0.20PSU, experienced hence ease of acquiring block

Sum 1.00 3.50

b. Internal factor analysis summary (EFAS) – Reliance Industries Limited –

S NO

Strength VRIO W R WS Comments


1 Strong Financial position V,R 0.10 4 0.40 Has cash and cash Equivalents of Rs 395 billion

2 Project management capabilities

V,I,O 0.10 4 0.40 High reputation for completing projects in time eg KG block, Jamnagar Refinery

3 Strategic alliances & JVs O 0.08 3 0.24 Strategic Alliance with BP, Chevron & Carrizo

4 Drilling & Exploration Expertise

V,I 0.07 3 0.21 More than a decade of experience in exploration

5 Market Share ( % of exploration )

R,I 0.07 3 0.21 Around 28% of exploration at indian levels

6 Enhanced International Presence

V,O 0.05 3 0.15 3-4 countries with only 10 blocks under the belt

7 Forward Integration V,R,I 0.03 4 0.12 As Omcs & polyesters and petrochemical products

Weakness

1 High leverage position 0.15 4 0.60 Has a healthy DE ratio of 0.36

2 Lack of Skilled Manpower 0.15 3 0.45 There is a disparity in availability of skilled manpower

3 Excessive dependence on single asset

0.10 2 0.20 Only few key blocks that do bulk of production

4 Safety issues 0.05 4 0.20 Maintains high standards of safety

5 Organization Structure 0.05 4 0.20 Fast discussion making ability (Pvt Sec Company)

Sum 1.00 3.38


S NO

Strength VRIO

W R WS Comments

1 Strong Financial position V,R 0.10 3 0.30 Has cash and cash Equivalents of Rs 201 billion

2 Project management capabilities

V,I,O 0.10 3 0.30 Huge experience of completing lots of projects in time

3 Strategic alliances & JVs O 0.08 4 0.32 Exxon, Shell, TOTAL,petrobras, Sinopec etc

4 Drilling & Exploration Expertise

V,I 0.07 4 0.28 Working from past 50 yrs. in the biz of exploration

5 Market Share ( % of exploration )

R,I 0.07 5 0.35 Around 50% of market share in exploration in Indian Markets

6 Enhanced International V,O 0.05 4 0.20 Presence in more than 15 countries


Presence

7 Forward Integration V,R,I 0.03 2 0.06 No forward integration; tie-ups with buyers

Weakness

1 High leverage position 0.15 5 0.75 Very healthy DE ratio of 0.04

2 Lack of Skilled Manpower 0.15 3 0.45 There is a disparity in availability of skilled manpower

3 Excessive dependence on single asset

0.10 4 0.40 Has even distribution of big assets

4 Safety issues 0.05 4 0.20 Maintains high standards of safety

5 Organization Structure 0.05 3 0.15 PSU, limitation on decision-making

Sum 1.00 3.76

2. Strategic Factor Analysis Summary (SFAS) –

Strategic analysis consists of measuring the strengths and weaknesses of a company's position. There are a number of tools or methods used as the foundation for strategic analysis of a business; strategic factor analysis strategy is one of the most popular methods because not only does it focus on internal strengths and weaknesses but also on the external environment the company is operating in.

Reliance Industries Limited –

Strategic Factors- RIL W R WS D (S,I,L)

Comments

S1 Strong Financial position 0.14 4 0.56 L Has cash and cash Equivalents of Rs 395 billion

S2Project management capabilities 0.13 4 0.52 L

Has reputation to complete projects in estmated time limits eg development of KG D6 block

W1 Lack of Skilled Manpower 0.09 3 0.27 S,I There is a disparity in availability of skilled manpower


W2Excessive dependence on single asset 0.11 2 0.22 S,I

Has only one big exploration block with deals with maximum exploration for the company

O1Strong domestic energy demand growth 0.15 4 0.60 L

Enjoy value add due to forward integration

O2 NELP & OLP 0.12 4 0.48 L More ease to avail blocks

O3Untapped domestic oil and gas potential(More oil well discoveries)

0.08 3 0.24 I,L 29% of blocks area awarded are with RIL

T1Delayed Clearances & government interference 0.06 3 0.18 S,I

Due to multiple clearance , many approvals stuck at different stages

T2

Upstream skills, dependence on borrowed technology & equipment shortage

0.05 3 0.15 S,I Less experience hence dependence

T3 Currency exchange rate fluctuation

0.07 4 0.28 S,I,L Small International portfolio

Sum 1.00 3.50


Strategic Factors- RIL W R WSD

(S,I,L) Comments

S1 Strong Financial position 0.14 4 0.56 L Has cash and cash Equivalents of Rs 201 billion

S2 Project management capabilities

0.13 3 0.39 L Huge experience of completing lots of projects in time

W1 Lack of Skilled Manpower 0.09 3 0.27 S,I There is a disparity in availability of skilled manpower

W2 Excessive dependence on single asset

0.11 4 0.44 S,I Has even distribution of big assets

O1Strong domestic energy demand growth 0.15 4 0.60 L huge demand for the explored products

O2 NELP & OLP 0.12 4 0.48 L More ease to avail blocks


O3Untapped domestic oil and gas potential(More oil well discoveries)

0.08 4 0.32 I,L 50% of blocks area awarded are with RIL

T1Delayed Clearances & government interference 0.06 4 0.24 S,I

Being a PSU has minimal government clearances problems

T2

Upstream skills, dependence on borrowed technology & equipment shortage

0.05 4 0.20 S,I vast expereince

T3 Currency exchange rate fluctuation

0.07 2 0.14 S,I,L bigger international portfolio

Sum 1.00 3.64

3. Score Comparison between RIL and ONGC –

Score Comparison RIL ONGC

IFAS 3.38 3.76

EFAS 3.42 3.50

SFAS 3.50 3.64

4. TOWS Matrix – This analysis helps us to get a better understanding of the strategic choices. It helps us to ask, and answer, the following questions: How do we:

Make the most of your strengths? Circumvent your weaknesses?


Capitalize on your opportunities? Manage your threats?

A next step of analysis, usually associated with the externally-focused TOWS Matrix, helps us to think about the options that we could pursue. To do this we match external opportunities and threats with our internal strengths and weaknesses, as illustrated in the matrix below:

TOWS Strategic Alternatives Matrix

External Opportunities (O)1.2. 3.4.

External Threats (T)1.2. 3.4.

Internal Strengths(S)1.2.3.4.

SO"Maxi-Maxi" Strategy

Strategies that use strengths to maximize opportunities.

ST"Maxi-Mini" Strategy

Strategies that use strengths to minimize threats.

Internal Weaknesses (W)1.2.3.4.

WO"Mini-Maxi" Strategy

Strategies that minimize weaknesses by taking advantage of

opportunities.

WT "Mini-Mini" Strategy

Strategies that minimize weaknesses and avoid threats.

This helps you identify strategic alternatives that address the following additional questions:

Strengths and Opportunities (SO) – How can you use your strengths to take advantage of the opportunities?

Strengths and Threats (ST) – How can you take advantage of your strengths to avoid real and potential threats?

Weaknesses and Opportunities (WO) – How can you use your opportunities to overcome the weaknesses you are experiencing?

Weaknesses and Threats (WT) – How can you minimize your weaknesses and avoid threats?

Reliance Industries Limited –


Strength Weakness

S1. Strong Financial position W1. Organization StructureS2. Project management capabilities W2. Safety issues

S3. Strategic alliances & JVs W3. Excessive dependence on single asset

S4. Drilling & Exploration Expertise

W4. Lack of Skilled Manpower

S5. Market Share ( % of exploration )

Opportunity SO Strategty WO stretegyO1. Strong domestic energy demand growth Company should leverage its

financial position and expand into untapped market

Through FDI company can from more JV's and

strategic alliances for skilled manpower. Also by

participating in NELP & OLP it can reduce dependence

on single asset

O2. NELP & OLPO3.For petroleum products and pipeline sector, FDI is permitted up to 100% through automatic route.

O4.Untapped domestic oil and gas potential(More oil well discoveries)

Company should focus on new markets (shale gas, cbm through

& oil sands)O5. Different types of Oil Reserves, CBM, Shale Gas

Threats ST Strategy WT StrategyT1. Delayed Clearances & government interference

With its project management skills & financial position company should focus on

developing existing blocks on priority

Focus on existing portfolio

T2. Currency exchange rate fluctuation

T3. Upstream skills, dependence on borrowed technology and equipment shortageT4. Increased competition within government and private players

Comment on strategy Formulations for RIL


External Factors(EFAS)

Internal Factors(IFAS)


Strength WeaknessS1. Market Share ( % of exploration )

W1. Organization Structure

S2. Strategic alliances & JVs W2. Safety issues

S3. Strong Financial position W3. Excessive dependence on single asset

S4. Project management capabilities

W4. Lack of Skilled Manpower

S5. Drilling & Exploration Expertise

Opportunity SO Strategy WO stretegy


Internal Factors(IFAS)

External Factors(EFAS)

O1. Strong domestic energy demand growthO2. NELP & OLP

Company should exploit available opprotunities in

natural gas, cbm and shale gas

With upcoming types of oil reserves company can focus

on training manpower to exploit these opportunities

O3. Untapped domestic oil and gas potential(More oil well discoveries)O4. For petroleum products and pipeline sector, FDI is permitted up to 100% through automatic route.O5. Different types of Oil Reserves, CBM, Shale Gas

ST Strategy WT StrategyThreats

T1. Delayed Clearances & government interference

Company can do forwrad contract for reducing the

impact of currency exchange rate fluctuations

Given the increase in competition among existing

players focus on faster decision making is vital

T2. Upstream skills, dependence on borrowed technology and equipment shortage

T3 . Currency exchange rate fluctuation

Company should also reduce the impact of dependence on borrowed technology from its

project management capabilities and drilling

expertise

Comment on strategy Formulations for ONGC –


5. Recommendations and Conclusion –


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Business Policy and Strategy_Project Report